What professionals look for in refinances

By: James E. Veale, CPA, MBT
Senior Vice President of Tax and Government Affairs
& Director of Originator Recruiting for Security One Lending

Professional gatekeepers, such as CFPs, CPAs, and attorneys look at various aspects of a mortgage to see if it is advisable for their client.  One way to review a mortgage is to look at a projected amortization schedule to determine if the loan makes sense.  In a refinance or switch for more proceeds, they look at the additional proceeds, if any, and see if the accumulated costs are warranted.  They also look at the percentage annual costs based on monthly compounding.

For example, in the attached  Chart: Costs to refinance schedule with no upfront costs or monthly servicing fees, in less than six years, the borrower will experience as much accrued total cumulative costs as proceeds received.  In less than 13 years, those costs will have tripled.  At the end of 38 years, a little short of $20,300 will have grown to be over $721,000 in total cumulative costs.

Is it really all about proceeds?

Some people in our industry believe that simply telling a senior that $20,292 dollars in additional proceeds will have an increased cost of 0.75% in ongoing FHA MIP on the entire loan is sufficient.  While that might be meaningful to a handful of seniors, it is not meaningful to many more.  Most of us seeing the accompanying schedule will be surprised to see the impact of switching and we are experienced mortgage originators.  Imagine how hard it is for an individual who has been a hard working municipal sanitation worker for 40 years to imagine what the switch might bring.

If it seems like the purpose of this article is to throw ice water on the enthusiasm expressed in the industry about switching and higher proceeds, in small part it is.  It is also to help originators understand how much a small increase in backend fees can mean to a senior.  Nothing speaks to the concerns of seniors like seeing if they live until 100 in their present home, an additional $20,300 could cost them over $721,000 or at the end of six years they will owe double of what those additional proceeds might be.

A real life example…

For purposes of the example, we will assume our new borrower, Switch N. Pipeline, was born on July 1, 1948 and the home was appraised at $356,000.  This is the first HECM which Switch will be getting.  The FHA Case Number is dated September 23, 2010.  It will still be in the pipeline on Monday, October 4, 2010.  The current application reflects a 4.99% fixed interest rate with no upfront costs, no monthly servicing fees, and ongoing MIP at an annual rate of 0.5%.

The owner of PQR Lending, Inc., the mortgage originator, just called Switch to see if he would like over $20,000 in additional proceeds at no additional costs other than the ongoing MIP rising to 1.25% per annum and the interest rate will remain 4.99%.  It is the duty of the mortgage originator to make Switch aware of all possible HECM options he might have.  It is also the duty of the industry, HUD, and counseling to help the borrower perceive what the right course of action might be through providing financial analysis about the mortgage which most borrowers cannot easily calculate themselves.  The proposed schedule is one means of fulfilling that obligation.

Switch understands it could mean more costs long-term and has no interest leaving his home until he dies.  Should Switch elect the higher principal limit?  Switch does not want to incur unnecessary costs by making unwise decisions.  This schedule supplies the answer to that question and much more.  Still there are reasons for getting additional proceeds which overrule any concern for long-term or even short-term costs.  All of that must come into play before reaching a final conclusion.

No one schedule or disclosure can completely answer all questions.  The senior needs to work through his entire financial situation.  There is health, future physical impairments, spousal concerns, heirs, and a myriad of other issues to consider.

The question arises if a borrower is thinking about switching should additional counseling be required?  It is surprising that HUD did not believe so.  I think many senior advocates would disagree.  It seems lenders should be at a minimum providing a schedule similar to the one attached.  It certainly is simple to provide since the lender has all of the information.

The schedule shows how much the total additional costs will amount to on a cumulative basis each year.  Please note the schedule uses the word Traditional to mean a HECM which has an ongoing MIP annual rate of 0.5%.  The schedule needs to be refined with better headings, more information on what is being compared, etc.  Its primary purpose in its preliminary form is to present one way to lay out the information so that seniors can grasp the total costs of switching to get more proceeds when the ongoing MIP rises to 1.25% per annum.

Readers with opposing ideas or improvements are encouraged to comment.